S&P 500 and Nasdaq Dropped 1% As Banks Downgrade Drag Indexes

Barry Adams
08 Aug, 2023
New York City

Banks led decliners after Moody's Services lowered its ratings on 10 small and regional banks and placed large banks on its negative watch lists. 

In a wide ranging alert about the banking industry, the rating agency belatedly highlighted fast developing stress for small to large banks as rates continue to rise. 

Banks are heading into perfect storms as depositors flee for higher rates  to other forms of investments, undeclared losses mounted in the securities held by banks and impending recession in early 2024 is likely to create additional headwinds to credit quality. 

Moreover, commercial real estate loans are facing investor discontent on growing worries linked to elevated office vacancy rates and default worries. 

“U.S. banks continue to contend with interest rate and asset-liability management (ALM) risks with implications for liquidity and capital, as the wind-down of unconventional monetary policy drains systemwide deposits and higher interest rates depress the value of fixed-rate assets,” Jill Cetina and Ana Arsov said in the Moody's research report. 

Moody's placed Bank of New York Mellon, Cullen/Frost Bankers, Northern Trust, Truist Financial, U.S. Bancorp and State Street under review for a possible downgrade.  

Most banks reported flat or modest decline in deposits but deposit mix worsened and banks paid higher rates to retain deposits. 

Moody's also lowered outlook for 11 banks including Capital One, Regions Financial Corp, Fifth Third Bancorp and Citizens Financial. 

"In the current high-rate environment, banks with sizable unrealized losses that are not reflected in their regulatory capital ratios are vulnerable to a loss of confidence. Additionally, a higher share of fixed-rate assets on the balance constrains a bank's profitability and, thus, its ability to grow capital and continue lending. 

Risks may be more pronounced if the US enters a recession – which we expect will happen in early 2024 – because asset quality will worsen and increase the potential for capital erosion," Moody's analysts noted in the research report. 

 

China Exports Declined 3rd Month In a Row 

China reported exports declined for the third month in a row and trade surplus also fell after imports also fell in July. 

Exports declined 14.5% to $281.7 billion and imports fell 12.4% to $201.1 billion resulting in a trade surplus of $80.6 billion from $102.7 billion a year ago. 

Politically sensitive exports to the U.S. fell 23.1%, ASEAN countries 21.4% and to the EU declined 20.6%. 

Exports of rare earth materials, critical for electric batteries. in July soared 49% from a year earlier to 5,426 metric tons, supported by strong international demand for battery powered vehicles and wind power systems. 

The sharp fall in imports was noticed by commodities market and copper and other base metal prices came under pressure and weak exports also highlighted the slowing global demand for Chinese products and reorienting of global supply chains away from China. 

 

U.S. Indexes & Yields 

The S&P 500 index traded down 1.0% to 4,475.14 and the Nasdaq Composite futures fell 1.3% to 13,811.55. 

The yield on 2-year Treasury notes decreased to 4.74%, 10-year Treasury notes inched lower to 3.99% and 30-year Treasury bonds edged down to 4.17%. 

Crude oil decreased $0.97 to $80.96 a barrel and natural gas prices increased 1 cents to $2.74 a thermal unit. 

 

U.S. Stock Movers 

Banks led decliners in trading after the Moody's placed several banks on negative watch list. 

M&T Bancorp declined 3.2% to $137.19, Regions Financial fell 2.2% to $20.69, Citizens Financial Group decreased 3.2% to $30.39 and PNC Financial Services dropped 3.5% to $127.79. 

United Parcel Services, Inc declined 0.8% to $180.59 after the parcel delivery company reported weaker-than-expected revenue in the second quarter. 

The company also lowered its full-year outlook citing macroeconomic headwinds. 

Chegg Inc increased 6.3% to $10.66 after the online education and text book provider reported  better-than-expected revenue in the second quarter. 

Datadog Inc plunged 18.3% to $86.65 after the cloud computing monitoring services provider forecasted weaker-than-expected sales in the third quarter and lowered its full-year outlook.